Colliers’ Duffy: ‘The Bleeding Has Stopped’ for Houston Office Market

Patrick Duffy

HOUSTON – The Houston office market – the primary casualty of the oil bust – appears to be in a recovery mode following a couple of rough years, according to the President of Colliers International Houston.

“We are comfortable that the bleeding has stopped,” said Patrick Duffy, head of the Houston office of the commercial real estate firm.

Duffy, speaking at the firm’s Houston Trends 2017 event at the Houston Country Club earlier this week, said office rents and vacancy rates should hold steady in the year ahead, following two bad years.

The supply of sublease space was a normal 3 million SF until the fall of 2014. That’s when OPEC, led by Saudi Arabia, hit the American oil business hard when it voted – on Thanksgiving Day 2014 – to continue oil production at high levels. Oil prices took a nosedive and American energy companies took on great losses and laid off workers. Some 100 energy companies, many of them based in Houston, filed for bankruptcy.

Houston lost some 80,000 energy related jobs, Colliers reports. Oil prices, which had been as high as $107 a barrel in the summer of 2014 had dipped below $30 in early 2016.

In the contraction, energy firms vacated huge blocks of Houston office space. The sublease space supply grew to more than 12 million SF as major companies such as Shell and Conoco tried to lease their unneeded office space to other businesses.

In the fourth quarter of last year, the sublease supply finally declined a bit – down to 11.4 million SF, Colliers reported.

Oil prices have recovered to more than $50 a barrel and the Permian Basin is being recognized as a profitable play with outstanding long-term potential.

“Oil companies are taking back some of the sublease space,” Duffy said. “The increase in vacancy is finally starting to slow.”

New office construction is winding down. Only 3 million SF of office space is under construction, most of that being Hines’ 609 Main at Texas tower which will be completed in a few weeks. Houston has a total of 230.8 million SF of office space, according to Colliers.

That’s not to diminish the fact that 2016 was indeed a bumpy ride. The overall Houston office vacancy soared to 17.5 percent at year-end, up from 15.3 percent at the end of 2015, Colliers reported.

The office market is one of the dark spots in the overall Houston real estate picture. Some segments performed nicely last year and single-family home sales had their best year ever in 2016, according to the Houston Association of Realtors.

Duffy said office and multifamily are the two weak spots in the Houston commercial real estate cycle. The retail and industrial sectors are strong.

The multifamily occupancy rate declined to 88.6 percent at year-end, down from 92.5 percent at the end of 2015, Colliers reported.

Some 22,615 apartment units were completed in 2016, up from 20,148 units in 2015, according to Colliers.

Colliers reports 61 apartment complexes with 15,933 units are currently under construction. But much of the construction is centered in the Inner Loop and Downtown and it’s all high-end Class A supply.

The B and C multifamily markets have strong occupancy and is in high demand with investors, Duffy said.

“We get people calling every day saying: ‘I want to buy apartments. I want to buy apartments. I want to buy apartments.’ But there’s very little inventory,” Duffy said.

The retail center market in Houston is strong with a 5.8 percent vacancy rate and that tightness is projected to continue in 2017.

The retail market, which continues to plow into Houston’s suburbs to meet population growth, has plenty of new construction and most of the new centers are 100 percent leased when they are completed, Duffy said.

New retailers such as Dick’s Sporting Goods and Total Wine have entered Houston. The recent closure of the Sports Authority chain was quickly healed with no lasting scar.

Houston has 535 million SF of industrial space and 5.2 million SF is under construction, Colliers said. FedEx and IKEA have major industrial buildings under construction.

Overall, Duffy said, the Houston real estate market has brighter days ahead. “We are getting back to business as usual in Houston, which is a great place to be.”

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Texas-based RealtyNewsReport.com covers regional and national news of significant trends and transactions in commercial and residential real estate. The publication was founded by Ralph Bivins, an award-winning journalist with extensive experience in print, broadcast and online media. Bivins recently received a number of awards in the 66th Annual National Association of Real Estate Editors Journalism Competition.